Bitcoin falls: is it time to buy or sell?
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(CNN) -
Stomach-churning wild moments are part of the experience when you buy a ticket to the cryptocurrency circus.
But the volatility of the past week was enough to make some of the faithful believers in digital currencies wonder if they fell for a hoax.
On Wednesday, a broad cryptocurrency crash wiped out about $ 1 trillion in market value, a staggering drop from $ 2.5 trillion a week ago.
Bitcoin, which accounts for more than 40% of the global cryptocurrency market, plunged 30% to $ 30,000 on Wednesday, its lowest point since January.
On Friday, bitcoin rallied slightly to around $ 37,000.
The cryptocurrency was affected by ongoing regulatory concerns, and despite its recovery it was far from its all-time high above the US $ 64,000 it reached just a month ago.
Volatility is present in the fledgling cryptocurrency market, but the explosive growth of digital assets in the last year has attracted crowds of amateur and professional investors looking for a quick profit.
Many of them take advantage of the hikes and fold, or turn to panic selling when the going gets tough, exacerbating profits or losses.
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This week, a combination of factors - such as government warnings about increased regulation and tweets from influential market driver Elon Musk - shook an already churning market.
What happened?
The cryptocurrency market had been especially unstable for about a week before Wednesday's crash.
On Wednesday, May 12, bitcoin was down 12% after Elon Musk retracted Tesla's pledge to accept bitcoin as a form of payment, citing concerns about the cryptocurrency's huge carbon footprint.
You can no longer buy a Tesla with bitcoin 1:03
Musk added to investor distress this past weekend with a pair of seemingly contradictory tweets about bitcoin that left them with doubts.
That same Wednesday, the big drop occurred after the Chinese authorities indicated that they were going to take strong measures against the use of cryptocurrencies in the country.
The Central Bank of China issued a warning to Chinese financial institutions and companies not to accept digital currencies as payment or offer services with them.
The threat of further regulation sparked panic, and bitcoin plummeted before rebounding slightly and stabilizing.
Other cryptocurrencies also sank: Ethereum fell more than 40%, while dogecoin and binance lost around 30%.
On Thursday, bitcoin recovered some losses and was back above $ 41,000.
But a statement on Friday from Chinese officials reiterating the need to crack down on cryptocurrencies caused it to slide again.
That afternoon it was trading at around US $ 37,000.
Other cryptocurrencies were also in the red.
China's regulatory concerns
China has long placed limits on cryptocurrency trading within its borders.
Authorities declared in 2013 that bitcoin was not a real currency and banned its use by financial and payment institutions.
Individuals can own or trade cryptocurrencies, but its main exchanges in mainland China were closed.
At first glance, this week's statements do nothing more than underscore China's rejection of cryptocurrencies in general.
And they sent a clear signal that Beijing is not going to loosen its grip on the market in the short term.
Authorities are also launching a state-backed digital yuan that would keep money flows under strict supervision.
And it's not just China
On Thursday, Federal Reserve (Fed) Chairman Jerome Powell warned of the potential risks that cryptocurrencies pose to the financial system.
Powell also said that the Fed will release a document this summer that will explore the implications of the US government developing a digital currency of its own.
A possible US Central Bank digital currency "could serve as a complement, rather than a substitute, for cash and current digital forms of the dollar in the private sector, such as commercial bank deposits," Powell said.
The Treasury Department is also paying attention to the cryptocurrency space.
On Thursday, officials said that any digital currency transfer valued at $ 10,000 or more must be reported to the Internal Revenue Service.
"The cryptocurrency already poses a significant detection problem by facilitating illegal activity in general terms, including tax evasion," the Treasury said in a statement.
"Despite constituting a relatively small portion of business revenue today, cryptocurrency transactions are likely to increase in importance in the next decade, especially in the presence of a broad-based financial account reporting regime."
Bitcoin rose nearly 6% on Thursday, but trimmed its gains following remarks by US officials, according to Bloomberg.
The future of cryptocurrencies
The wild fluctuations of the week were a test for crypto fans.
True believers tend to take a long-term view: In early 2020, bitcoin was trading around $ 7,000, which means it's still 400% up in that time, even after crashing this week. .
"We all tend to focus on the day-to-day, week-to-week," William Quigley, chief executive of Magnetic, a crypto-focused investment fund, said Wednesday.
"But this is not how most people buy cryptocurrencies, or even stocks."
Is it a bubble?
Likely, according to ethereum co-creator Vitalik Buterin.
In an interview with CNN Business this week, Buterin said he wasn't surprised by the drop, because he's seen all of this before.
"We have had at least three of these big crypto bubbles so far," he noted.
"And often the reason the bubbles end up stopping is because some event happens that makes it clear that the technology is not there yet."
Laura He, Michelle Toh, Anneken Tappe, Paul R. La Monica, and Matt Egan contributed to this report.
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